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​Sailing the Tradewinds to Fraudulent Gains

When her commission structure is cut, an advertising sales manager finds a way to make up for the lost income. 

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​Do you know why I’m here?” asked Robert Schull, the forensic audit manager at Orion Advertising, a direct mail marketer. Cathy Francis, Orion’s regional sales manager, responded, “Yes, and I will return the checks.” Her response took Schull by surprise as the purpose of the meeting was to discuss the claim of a questionable sales bonus. So, his next question was, “How much are we talking about?” Francis replied, “About half a million dollars.”

Orion’s primary product is a print magazine where local businesses advertise their services. The magazine is delivered by mail to residents within predefined geographic markets. Orion’s pricing plan is simple: Front-facing pages are priced at a premium while back-facing pages are priced at approximately half the rate as the front pages. 

Sales representatives work for commission with some additional sales incentives. One of the incentives was a $5,000 bonus for each new customer. But because advertising revenues were in decline due to online competition, Orion reduced its commission structure for all sales representatives. 

The internal control environment at Orion also suffered from the decrease in advertising revenue. Accounting positions were eliminated and departing employees were replaced with lower cost, less experienced people. Tasks were consolidated, resulting in a lapse of separation of duties controls. Management was unconcerned. 

Francis was a successful regional sales manager who routinely earned a six-figure income. The new commission structure upset her because she was unable to earn the same income she’d become accustomed to. Francis was aware of the challenged internal control environment and believed she could execute a simple fraud scheme to replace her lost income. She rationalized that the money she would be taking was, in fact, owed to her for her hard work.

Francis set up a shell company called Tradewinds Inc. Tradewinds would bill her new customers for the premium rate regardless of where their ads appeared in the magazine. Tradewinds would then pay Orion as if the customers received the back-of-page advertising. Francis knew she could cover any billing discrepancies with accounting by telling the billing department that the customer was billed at the incorrect rate. 

Lessons Learned


  • A strong control environment requires sufficient qualified staff to institute appropriate separation of duties. Internal audit should assess a company’s control environment, which includes evaluating the qualifications of employees in key positions. 
  • Commission-based compensation or incentive programs are subject to manipulation. Coupled with weak internal control environments, significant performance-based compensation plans are an invitation for fraud, waste, and abuse.
  • Management should take ethics violations seriously. Disciplinary action should be consistently applied to all employees regardless of job title or historic performance. 
  • Internal auditors working in environments where employees receive commission-based compensation should add a review of these programs to their audit plan. The review should include a thorough understanding of the mechanics of the program, the separation of duties within the program, and the existence of preventive and detective controls in conjunction with validating the integrity of the program.

There were some initial hiccups with Francis’ scheme. For example, some of her new customers sent their payments to Orion instead of Tradewinds. Because these payments were at the premium rate for back-of-page placement, it resulted in overpayments. Francis knew that overpayments would look suspicious, so she instructed the billing department to adjust accounts for the overpayments or to transfer the overpayments from one customer account to another. No one in accounting took a serious interest in the overpayments or transfers.

Francis’ scheme went undetected for several months and involved more than replacing any lost income she sustained from the change in the commission plan. However, this was not enough for Francis. In addition to marketing local businesses to residences, Orion had national accounts that would advertise in all magazines across the country. Francis knew that national accounts payments were multiples of her best local customers and theorized that she could scale her fraud scheme. The problem she faced was how she could deposit the large checks from national accounts into her local bank without raising suspicion.   

Robert Baggio was Francis’ neighbor and a local bank manager who had just been offered a promotion to manage a branch out of state. She invited him to her house under the guise of celebrating his new job before confiding in him about her scheme and dilemma in scaling it to national accounts. Francis offered Baggio a percentage of the proceeds if he could assist her with the fraud. He was receptive to the offer and told her he would open a bank account at his new branch under the name Original Retail In Online News (ORION). That way, checks made out to Orion could be deposited into the account with little scrutiny by bank auditors. 

Francis knew that national customers would question being billed by Tradewinds but theorized that a change of billing address may go undetected. She created a change of billing address letter for her national account customers and instructed them to mail checks to a post office box. As suspected, many of her national account customers simply made the change of billing address in the accounts payable system and checks began appearing in Francis’ post office box. Upon receipt, she would overnight the checks to Baggio, who would deposit them in the bank account under his control.

Amanda Olson was a recent hire in the accounting department at Orion. Her first assignment was to look at a series of transfers of overpayments made by Francis between customer accounts. Confused, she called Francis for an explanation. Francis rudely dismissed Olson and ordered her to make the transfers as instructed. Olson reported the encounter to her manager. She knew something was awry with Francis’ transferred overpayments from customer account to customer account.  

Orion’s internal audit department knew Francis was no stranger to questionable business practices. Just the year before, she attempted to earn the new customer bonus by misrepresenting the owner of an existing customer who started a new business. Francis was reprimanded when it was discovered. Because of her strong performance, management was unwilling to part ways with her. Schull, who had interviewed Francis the year before, knew she could be difficult and decided to interview her face to face. When she confessed to Schull, he began a companywide investigation that uncovered a similar scheme her boss was conducting that netted him more than $1 million.

Orion contacted local law enforcement. For her actions, Francis was sentenced to two years in prison. Baggio was also arrested and served time in prison.  

Grant Wahlstrom
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About the Author

 

 

Grant WahlstromGrant Wahlstrom<p><span><span>Grant Wahlstrom, CIA, CPA, CFE, is the forensic audit manager at a privately held company in Hollywood, Fla. </span></span>​</p>https://iaonline.theiia.org/authors/Pages/Grant-Wahlstrom.aspx

 

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